Tag Archives: share

Stocks in Focus: DS Smith

I last wrote about packaging firm DS Smith in July, following the announcements of its 2016/17 full year results. At the time the company announced that it was acquiring an 80% share of Interstate Resources for $920m. This week DS Smith published its six month results to 31 October 2017.

DS Smith has the majority of its earnings from overseas and is therefore sensitive to foreign exchange movements. The recent results benefitted from a weaker sterling but also showed good organic growth. The highlights included 5.2% like-for-like volume growth and 19% revenue growth (14% in constant currency). However, margins fell, mainly due to an increase in paper costs.

The integration of Interstate is progressing well and the company has upgraded the cost synergy target from $25m to $30m. It also announced in October the €208m purchase of EcoPack and EcoPaper, a packaging and paper group in Romania. The purchase of Interstate is DS Smith’s first venture into the US market. Compared with the European market, the US market is more consolidated, with the top five businesses comprising 74% of the market but it is a region the management has highlighted as an opportunity for expansion.

Growing convenience stores, a switch to e-commerce and the increased importance of sustainability (DS Smith is the largest paper recycling company in Europe) has led a drive towards DS Smith’s packaging solutions. This has helped generate the volume growth seen in the recent results. Later this month the company will be promoted to the FTSE 100 – a testament to the growth it has achieved both organically and through strategic acquisitions. However, going forward, DS Smith will hope to continue passing the higher costs of paper on to customers so that it does not negatively impact margins further.

https://www.nwbrown.co.uk/news/company-report-library/

Advertisements

Stocks in Focus: Prudential Plc

This week I am looking at Prudential, the multinational life insurance and financial services company.  Prudential has had a strong year after economic conditions turned in its favour, reporting a new business profit increase of 17 per cent for the year to September 30. The third quarter trading update also reassured investors that there are still clear structural opportunities in each of its three key markets – Asia, the US and the UK.

Much of the rise in the new business profit has come from the Asian market. This growth is expected to continue to drive the share price going forward. Management are hopeful that the Asian business will double in size every five to seven years thanks to a growing and increasingly affluent Asian middle class that has driven demand and sales.

Elsewhere, the company intends to strengthen its position in the UK asset management market, targeting the retirement income needs of an aging UK population, following its merger with M&G asset management. Prudential also own one of the largest life insurance providers in the US, Jackson National, and expect this area to perform well given the demographic shift of Baby-Boomers moving into retirement.

The Asian business now accounts for over a third of group profits but faces strong competition, with companies such as AIA having a much greater presence in China. Other concerns include how a weakening of the US Macro backdrop could impact the US business, and whether an excessive rise in UK interest rates could threaten the UK annuity business. While the company appears to be well-poised for further growth, these threats are significant.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: RBS Group Plc

Following the UK budget last week, Philip Hammond, the Chancellor of the Exchequer announced plans to begin selling the government’s remaining 71 per cent stake in The Royal Bank of Scotland (RBS) towards the end of 2018. It is his intention that the FTSE 100 bank will once again become entirely privatised. At the height of the financial crisis, RBS had no choice but to accept a £45bn government bail-out on the back of the largest annual loss in UK corporate history.

On previous occasions, the Chancellor has avoided setting a deadline until RBS had reached an agreement with the U.S. Department of Justice (DoJ) over a multi-billion dollar fine for miss-selling mortgage-backed securities in the lead-up to the 2008 financial crisis.

Unsurprisingly, the announcement came shortly after a good set of third quarter results, which demonstrated a broadly reassuring outlook for RBS. Following several years at a loss, RBS posted a net profit of £392m for the quarter, which was largely attributed to lower costs and significantly lower restructuring and litigation charges compared to 2016. More importantly, a number of legacy issues it has faced since the crisis appear to be coming to a close including the DoJ fine which the Bank expects to settle in the coming months although it is still unclear what the final bill may be.

It is promising to see that the business appears to be on track to achieve its 2018 targets and hopefully see its first full year of net profit since the bail-out. If its recovery continues, investors should eventually look forward to a reinstated dividend. However, RBS still faces a number of risks given that it is significantly geared towards the UK in the face of Brexit and there are still other litigation cases yet to be settled.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Vodafone

This week I am looking at telecommunications giant Vodafone, which recently published its half-year results. For the past couple of years the company has been facing tough competition in Europe and losing market share in Germany, Italy, Spain and the UK. Furthermore, Vodafone had to write-down £4.3 billion earlier this year in India, its most promising growth market, when competition intensified with the introduction of a new mobile carrier that offered six months free service to customers.

However, these concerns seem to be easing as Vodafone surprised investors last week by raising its annual profit forecast. The revised outlook is the result of a stronger than expected start to the year with notable improvements in operating profit, service revenue and cash flow. European operations have performed well with strong performances in Spain and Italy. The group also announced that the merger of its Indian operations with former local rival, Idea Cellular, is progressing well, which gives hope that the combined business can recover in the near future. Management has raised its guidance for full-year profit growth to around 10% from 4%-8% and the interim dividend was increased, which reflects a growing confidence in the future positive performance of the group.

Several undertakings led to these encouraging results, namely improvements in the quality of products and services, investment in networks, cost cutting measures and the merger of underperforming operations. Nonetheless, the cost of delivering these enhancements, including spending on infrastructure and mobile spectrum, is enormous. Investors should not neglect the importance of sustainable revenue and strong cash flow generation when evaluating companies.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Connect Group

This week I am revisiting Connect Group, the UK-based distribution and logistics company, following the announcement of its preliminary 2017 full year results last week.

The last few years have been challenging for the company, which has been managing decline in its traditional newspaper and magazine distribution business whilst focussing on its broader distribution offering.  Having sold off its Education and Care division earlier this year, the group now operates across three key divisions: News & Media (at the heart of which sits Smiths News, the UK’s leading newspaper and magazine distributor), Books and Parcel Freight (predominantly under the Tuffnells brand).

Following a strategic review earlier this year, the group now has centralised leadership teams across all of its divisions with the primary aim of becoming more efficient. Reducing costs is particularly vital in the News & Media division as the downward trend in newspaper and magazine sales looks set to continue – it is therefore encouraging to see that profits for Smiths News rose by £2.7m this year.

Unfortunately, the growing areas of the business did not perform quite so well, with Tuffnells seeing operating profits fall by 20% despite an increase in volumes. The division faced higher variable costs due to erratic volumes on top of one-off costs to upgrade depot facilities. Pass My Parcel, the ‘click-and-collect’ business, is delivering strong volume growth thanks in part to the introduction of a returns service for Amazon late this year. However, the business is still loss-making at this early stage of its growth and is not expected to break even till the end of 2019.

Investors have reacted positively to the update, driving a significant recovery in the share price following a period of weakness. Looking forward, the shares still look cheap on many metrics – although management must ultimately convince the market that the growth areas of the business can offset decline in the traditional newspaper and magazine distribution market.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Centrica

At its recent conference, the Conservative Party revived its plans to protect families on standard variable tariffs. SVTs are the expensive plans that customers are automatically moved to when their cheaper fixed deals end. The government aims to cut gas and electricity costs by £100 a year for 17 million families and the draft energy bill published last week gives energy regulator Ofgem the power to cap SVTs. However, no action will be taken until the new legislation has been passed by Parliament and a decision has been taken on how the actual price cap is calculated – it is unclear how long this will take.

For Centrica, the parent company of British Gas and the biggest energy supplier in the UK, a price cap will certainly make market conditions challenging. The majority of British Gas clients are on SVTs and a cap will result in a fall in revenue, which in turn may put pressure on the company’s dividends. Unsurprisingly, it argues that capped prices will reduce competition in the industry, reduce choice for customers and potentially impact customer service – as supported by the Competition and Markets authority.

Nevertheless, Centrica has demonstrated its fortitude in being able to navigate this regulatory clampdown through a diversified product offering, its cost efficiency strategy and a focus on quality rather than quantity of its customer base. The share price has been weak since the cap was first announced and long-term shareholders need to consider whether this is an opportunity or a threat. Beyond this, the Labour Party’s plans to nationalise several industries, including the utilities sector, give market participants more to think about. For his part, Centrica’s CEO has signalled confidence in the business by buying shares in the company last week.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Shell

This week I am writing on Royal Dutch Shell, a company I last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.

The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business.  On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.

While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels.  A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand.  One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids.  To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions.  Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market.  While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.

Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available.  The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.

The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources.  Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated.  However if Shell delays investing in renewable energy it risks being left behind in a declining sector.

https://www.nwbrown.co.uk/news/company-report-library/